Will Declining Housing Values Threaten Your Retirement Plans?

(MoneyWatch)  According to the recently released S&P Case-Shiller Home Price Index, home values continue to fall in many parts of the country. If your house is falling in value, will the decline threaten your retirement plans?

Well, it all depends on whether you plan on moving.

Not Moving. If plan to stay in your current house, then the declining value shouldn't be much of a concern. When you bought the house, you paid what you thought was fair value for a house you liked. Now your main goal should be to get the house paid off before you retire. If you do that, then you've got a rent free place to live, which sets you up nicely for your golden years.

And if you wait long enough, housing values will probably recover. But again, if you don't plan to sell the house, it shouldn't matter.

Not Moving for 10 Years. If you don't plan on moving for at least 10 years, then the declining value shouldn't derail your retirement plans. Over the next decade, housing values should recover somewhat. Consider that if values fell 30 percent from their highs in your town, they only have to increase at about 3.6 percent per year for the next 10 years to get back to their previous highs.

Moving in Less than 10 Years. If you need to move in less than 10 years, then falling home values may be a threat to your long term plans. The real problem comes if you must to sell at a price that is less than what you paid for the home. In that case, you're losing your actual investment, not just prior appreciation.

Here are a few practical steps you can take to help minimize the potential damage:

• Don't invest a lot more into the home. Keep up on basic maintenance and repairs, but I wouldn't add a glamour bath. If housing values have been hit hard in your area, long term price appreciation will be tied primarily to any improvement in the overall economic environment.
• If you must sell for less than your purchase price, then don't spend more on a new house than what you got out of the old house. For instance, if you paid $400,000 for the home and sell it for $320,00, try not to spend more than $320,000 on your new home.
• Spending less on a new home may be easier than you think. If prices are down in your town, they're probably down in the place you're moving to. And if you wait 10 or so years, the new house's value may appreciate enough to restore the equity you lost when you sold the last house. So at the end of the day, the damage might not be as bad as it initially appeared.

Bottom line: If you don't move, declining home values aren't much of a threat to your retirement plans. If you don't plan on moving for at least 10 years, you can probably wait out the declines. But if you have to move in less than 10 years, consider spending no more on a new home than what you got out of the old home.

House photo from Flickr, courtesy of sagegale, CC 2.0